Frustration of the contract | An electrical company entered into a contract with a fertilizer company… Can the supplier back out of the contract on this ground? Discuss with reference to the relevant provisions of law.

Question: Frustration of the contract | An electrical company entered into a contract with a fertilizer company for the supply of transformers, the price to be firm there being no provision for escalation in price.

Subsequently, due to a hike in petroleum prices, the prices of transformer oil, an essential ingredient, of a transformer, were increased by 400%. Can the supplier back out of the contract on this ground? Discuss with reference to the relevant provisions of law. [HJS 1999]

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Answer

Explaining the concept “frustration of the contract” in Cricklewood Property & Investment Trust Ltd v. Leighton’s Investment Trust Ltd. 1943 KB 493, Viscount Simon LC said that it means “occurrence of an intervening event or change of circumstances so fundamental as to be regarded by the law both as striking at the root of the agreement, and as entirely beyond what was contemplated by the parties when they entered into the contract”.

To the same effect is the following statement of Lord Wright in Twentsche Overseas Trading Co Ltd v. Uganda Sugar Factory Ltd, (1945) 58 LW315 said

“The word frustration is here used in a technical legal sense. It is a sort of shorthand: it means that a contract has ceased to bind the parties because the common basis on which by mutual understanding it was based has failed. It would be more accurate to say, not that the contract has been frustrated, but that there has been a failure of what in the contemplation of both parties would be the essential condition or purpose of the performance.”

The alteration of circumstances must be such as to upset altogether the purpose of the contract. In the present case at hand, where an electrical company entered into a contract with a fertilizer company for the supply of transformers, the price to be firm there being no provision for escalation in price.

Subsequently, due to a hike in petroleum prices, the prices of transformer oil, an essential ingredient, of a transformer, were increased by 400%. The rise of the prices to 400% has an extreme exorbitant effect on the performance of the contract, rendering it impossible to perform.

Hence, Section 56 of the Indian Contract Act will come into operation, and such a contract will become void. The supplier can thus back out of the contract on the ground of extreme commercial hardship caused by the change of circumstances.

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Law of Contract Mains Questions Series: Important Questions for Judiciary, APO & University Exams

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8. Law of Contract Mains Questions Series Part-VIII
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